Clause 25.—(PUBLIC UTILITY UNDER TAKERS TO BE LIABLE TO THE PROFITS TAX.) (Hansard, 11 June 1951)
HC Deb 11 June 1951 vol 488 cc1817-53

10.45 p.m.

Mr. Geoffrey Hutchinson (Ilford, North)

I beg to move, in page 16, line 38, after "businesses" to insert: other than any water undertaking carried on by a statutory water undertaker as defined by the Water Acts, 1945 and 1948. The statutory water undertakings, to which this Amendment relates, have hitherto been immune from the payment of Profits Tax, and the purpose of this Amendment is to ensure that that immunity shall continue. On examination of the nature of these public undertakings and the methods by which their finances are arranged, it becomes perfectly clear that the application of Profits Tax to public undertakings of this character is wholly inappropriate. I hope to show that astonishing anomalies result from the attempt to bring these undertakings within the scope of Profits Tax—anomalies, I think, so striking that the right hon. Gentleman could not have been aware of them when he first proposed that the Profits Tax should be extended in this way.

These undertakings are all statutory undertakings carrying on their business in accordance with the provisions of various Acts of Parliament. They are not trading undertakings in the usual commercial sense. In the first place they are all supplying an essential public commodity; and in the second place their business is regulated by a variety of Acts of Parliament and Orders made by different Government Departments. They are controlled by the Minister of Local Government and Planning in relation to their charges, which cannot be varied without his Order. Furthermore, the Minister exercises complete control over the sums which they are permitted to place to reserve or to their contingency funds. Therefore, these undertakings carry on their business under conditions which are altogether different from the conditions of an ordinary commercial undertaking.

About two-thirds of these water undertakings are either local authorities or joint boards. In normal circumstances they are undertakings which are not conducted so as to produce any surplus. Their charges are balanced against operating costs. It is the usual practice, when their reserve funds and contingency funds have reached the statutory limits, for them to aim at adjusting their charges so as to meet their operating expenses. It is true that in recent years many of these undertakings have produced a taxable surplus. The reason for that has been the difficulty which every undertaking has experienced in carrying out normal maintenance work.

Those taxable surpluses out of which the Profits Tax will have to be paid represent deferred maintenance, and the surpluses, if the Chancellor of the Exchequer does not take them, will eventually be used for carrying out that deferred maintenance, which the undertakings are not able to do at present. If the taxable surplus which a local authority or joint board undertaking has at this time is absorbed in payment of Profits Tax, it will be necessary, when the time comes for the maintenance work to be done, to raise additional funds. Eventually it will mean that the charges of these undertakings will have to be increased or a deficiency precept levied on their constituent local authorities when that maintenance work can be done.

The application of this tax to undertakings of this character produces the most surprising anomalies. Take the case of the rural authorities. In many cases, the rural water authorities are today receiving or are promised a subsidy under the Rural Water and Sewerage Act, 1944. That is paid to them by the Government to enable them to extend their mains to those parts of their areas where there is no piped supply. I suppose that few hon. Members of this Committee do not appreciate keenly the feelings of the rural population regarding this subject of rural water supplies. Surely it is a most anomalous situation that an undertaking should, with one hand, be receiving from the Government a subsidy and, with the other, should be handing back Profits Tax, as it will have to do under the Chancellor's proposal. That is the most obvious anomaly.

But when one looks into the manner in which these local authority undertakings are financed, the anomalies become even more striking. Certain authorities have the power, which in most cases they have taken by special Private Acts, to levy a general water rate. By that I do not mean the ordinary water rate which is levied upon premises connected with the mains supply. These authorities have power to levy a general rate upon the whole of the hereditaments in their area to supplement the cost of operating their water undertakings. That power has been given to them for the very obvious reason of enabling them to obtain contributions, for what is regarded as a public service, from the owners of premises which, in fact, are not connected with the supply from the mains but which benefit indirectly from an efficient water supply.

Most of the local authorities in Scotland have this power of levying what I have called a general water rate. Some of the larger cities in England have a similar power. The proceeds of these general water rates and of the precepts which the joint boards are entitled to levy on the local authorities are not subject to tax; and therefore a water undertaking which has this right to levy a general water rate will enjoy a revenue which will not in any circumstances be subject to tax. In other words, a substantial part of the revenue of the undertaking is not taxable. Now those authorities may escape Profits Tax altogether.

But it is not every undertaking which has this special power. Most of the undertakings in England have no power to levy a general water rate on properties not connected to the mains. Their position will be altogether different. There will be no part of their revenue which is not taxable, while the water rate levied on their consumers may provide a surplus subject to tax. That is a completely anomalous position as between these two classes of local authority, one having the power to raise revenue which is not taxable, the other having no such power. One type of authority will not pay tax, and another class, not having the same statutory powers, will have to pay. It is a most complete anomaly.

Those local authorities without power to levy a general water rate may, of course, allow their operating costs gradually to rise and not to apply to the Minister for any increase in their scale of charges, thereby producing a deficit instead of a surplus on the undertaking. Such a deficiency could be charged to the general district rate levied over the whole of their area. I do not suppose that many local authorities want to conduct their water undertakings on these lines, but it may well happen that they will do so. I might remind the Committee that it is easy to get the consent of the Minister of Local Government and Planning to an increased scale of charges. In both classes of undertaking the deficiency which would eventually be charged upon the general body of ratepayers.

Of course, all the undertakings affected by this are not local authority undertakings. About one-third are statutory companies, whose undertakings are conducted subject to exactly the same control as the undertakings of the local authorities. They are not commercial trading concerns in the accepted sense. The companies, of course, have no power to charge any deficiency in the working of their undertakings on the general rate, nor have they any power to raise a general water rate. So the companies will have no alternative at all except to raise their charges. If their taxable surplus is taken in the form of Profits Tax and the undertakings begin to make a deficiency, they will have no choice except to apply for an increase of charges.

11.0 p.m.

The point I am making is that here one has these three different classes of undertakings, each of which is going to be affected by this tax in quite a different way. A tax which has such a different incidence as this tax will have in relation to these undertakings is, I submit to the Committee, a bad tax. We ought to be sure that a tax falls equally upon every class of person who will be called upon to pay it.

The Chancellor, in his Budget speech, dealt with this matter. He gave one reason, but only one reason, why he desired to extend this tax to these public undertakings. There is no revenue in this, or very little revenue—something less than £1 million. I think the right hon. Gentleman estimated that the yield of Profits Tax, extended to the water undertakings and to bus undertakings, which are the only two statutory undertakings affected, would be about £1 million, so that the effect of excluding water undertakings would cost the Treasury something less than £1 million. Whatever it is, it will eventually go on the water rate, so it really is a choice between one pocket and another.

The reason the Chancellor gave for this proposal was that it would bring the water undertakings into line with the nationalised gas and electricity undertakings. He gave no other reason than that. I submit that that reason, when one examines it, is really fallacious. Gas and electricity undertakings are trading undertakings in the ordinary sense of the term. They are selling a commodity and their profits depend upon the success with which they sell it and the price which they obtain for it. People pay for their gas and for their electricity according to the quantity which they consume. That is not the case with water. The ordinary domestic consumer does not pay for water according to the quantity of water he consumes. If he consumes no water at all, he still has to pay the water rate.

There is no escape from payment for water by a reduction in one's consumption. If electricity get too expensive, one switches off the electric fire, puts on one's overcoat—if one has one—and reflects on the advantages of a planned economy. But one cannot do that with water. One has to pay for water, so long as one remains connected to the supply, if one takes only a basinful every day.

Mr. Ellis Smith

Very cheap!

Mr. Hutchinson

Yes, the cheapest of all commodities, because it is still in the hands of private enterprise.

Mr. Ellis Smith

Municipal.

Mr. Hutchinson

Municipal and private enterprise. There is all the difference in the world between gas and electricity on the one hand and water on the other, because gas and electricity are ordinary trading commodities sold to people who can refuse to buy them if they wish, and the success of the companies selling them depends on the amount of the commodity they sell. That is not so with water, and if the right hon. Gentleman had reflected a little longer about that argument, he would have refrained from using it.

No doubt the Government anticipate that they will attract certain applause for increasing the Profits Tax. I am sure they will not attract any applause from anybody for imposing this tax upon these undertakings, since it must eventually be passed on either to the consumers or to the general ratepayers. I warn the right hon. Gentleman that sooner or later he will have to answer for increasing the local rates and for increasing the local water rates. I am sure that is not a result to which the right hon. Gentleman looks forward.

In these days when rates play an important part in the cost of living, as I said the other night when we were dealing with initial allowances, nobody wants to be regarded as responsible for putting up the rates. In the eventual result, that is exactly what this proposal will do, and for that reason, if for no other, I say it is a proposal in which every hon. Member is interested, perhaps I ought to say, in which the constituents of every hon. Member are interested. I say it is a bad proposal, and it is one about which I hope the right hon. Gentleman will think again.

Mr. Arthur Colegate (Burton)

I am extraordinarily surprised that the Chancellor of the Exchequer should think of taxing one of the elementary necessities of life, water. The Government have always treated profits as being rather rakish, as something that ought to be treated as being almost immoral, and at a time when inflation is rampant—I shall not give the reasons why it is rampant—it is felt that they must increase the Profits Tax not merely to get revenue but to see that the progress of inflation is checked. How could that possibly apply to water undertakings? These undertakings which give the most modest return to the investor cannot, as my hon. and learned Friend pointed out, profiteer. It is impossible, because they are controlled at every turn, both with regard to their prices and activities, their service conditions, and so on.

Here we can see once more that this Budget has been framed without using any imagination as to the effects of the different Clauses of which it is made up. I have already complained that the suspension of the initial allowances will hit the rural water supplies and make them much more expensive. Yet one of the inducements held out by the party opposite to people to vote for them was that they would see that there was a supply of piped water to every village in the land. We all know that they have failed largely in that. The money set aside for it has not yet been spent and here, in two places in this Budget, they are deliberately, as they must know, making the supply of piped water to the rural areas definitely more expensive.

There can be no question that rates must go up if part of the money available for repairs and maintenance is to be taken away in tax. As my hon. and learned Friend has pointed out, it means merely taking money from one pocket to put it into another. I think the Chancellor is making practically no concession, but he should for a moment forget a little of his arithmetic and show a little more heart and imagination. I have no doubt arithmetic is very good for bookkeepers and booking offices, and I have no doubt that his Budget is quite sound, but it is not sound in any respect as regards the effects that will be created by this Clause which has thoughtlessly been put in.

I appeal to the Financial Secretary to look at this matter again. The Chancellor will get a miserable revenue from it, and in the long run he will get no revenue at all. In the meantime, one of the most elementary services in any civilised community is to be taxed for the first time on this Profits Tax basis. It has been pointed out that it cannot possibly profiteer in any sense whatever. I do not know what size of dividend is paid by a water company, but it is something very small and the conditions which in certain industries do lead to immensely enhanced paper profits that could be taxed do not lead to enhanced profits of any sort in the water undertakings. I appeal to the Financial Secretary to look to this Clause, to try to imagine what it would mean, and then to drop it.

Mr. John Cooper (Deptford)

I wish to take advantage of this Amendment to ask the Financial Secretary to take into consideration the very special case in regard to the Metropolitan Water Board, which I think are the largest suppliers of water in this country. They are in a very special position, and I wish to put forward their special position in the hope that the Financial Secretary will give the matter some consideration. There is still time for them to be excluded from the effects of this Clause.

The short, yet peculiar, point that affects the Metropolitan Water Board is that, under Statute, as distinct even from municipalities and private companies, they are not allowed to set aside any money at all for the purpose of reserves. The method of operating the water board financially, which has proved very successful over many years, is to make the following provisions: that, after a year's working, if there is a financial surplus of more than £250,000, then the Board are automatically obliged to reduce the water rate. On the other hand, if there is a deficit in excess of £250,000, then the Board are empowered to increase the rate.

They have to undertake very large capital projects, which run into £6 million, £7 million or £8 million, and sometimes more than that, and they are not allowed to put any money on one side to reserve, even in preparation for these large capital ventures. They have to raise the whole of the amount by way of loan. Therefore, to use the word "profit" in regard to such special arrangements, defined by Statute, which affect the Board as they affect no other water supplier in the whole of the country, is, I suggest—

11.15 p.m.

Mr. Hutchinson

I suppose that the hon. Gentleman appreciates that every water undertaking is restricted by Statute as to the amount which it can place to general reserve fund and contingency fund?

Mr. Cooper

I am drawing the distinction that we are not even allowed to have a reserve fund at all, and in that respect I think the Financial Secretary will agree with me, because he understands the position of the Metropolitan Water Board. In that respect the Board are distinct from other suppliers. This peculiarity does, at least, create a prima facie case for the exemption of the Metropolitan Water Board from this Clause. Therefore, I ask, without labouring the point—the facts are quite clear—that the Minister should give this matter consideration in the hope that the position might be met by special provision.

Mr. Walker-Smith

I should like to return from the special problem of the Metropolitan Water Board to the general position put forward by my hon. and learned Friend. He expounded his case with all that persuasive authority that comes from his great experience and knowledge of these matters, but I cannot help recalling that he put forward an equally convincing case the other day in regard to initial allowances, and in spite of that no concession was forthcoming from the Treasury Bench. On that occasion we had the Economic Secretary to the Treasury, who brought with him a prefabricated brief, prepared in advance, which clearly shut out the possibility of his making any adaptation of his argument in response to the views put forward. This time we have the Financial Secretary to the Treasury, and I cannot really discern whether, amid the mass of documents he has brought in, there is a prefabricated reply or not.

Mr. Douglas Houghton (Sowerby)

Are the hon. Gentleman's own briefs prefabricated?

Mr. Walker-Smith

The hon. Member should understand that the briefs in which I deal are different from the briefs in which the Treasury Bench deal, but I would remind the hon. Member, as he should well know, that if anybody practising in my profession made his case without regard to the case put against him, he would not go very far.

After that rather unhelpful interruption, which illustrates, as I hope the Leader of the House will note, that one reason these debates take some little time is that hon. Members put these rather unhelpful points, may I say that what the Committee want to be told is on what principle Profits Tax can conceivably be attached to water companies. The whole burden of the case made by the Chancellor of the Exchequer on the previous Clause was that Profits Tax was a means of curbing the excesses of unbridled private enterprise.

But with water companies we are in an entirely different sphere. Water undertakings are a perfect example of the planned economy. Their reserves, the amount of their distribution, and the amount of their charges are all regulated by Statute. How, then, can there be any justification for applying the principle of Profits Tax on the basis put forward by the Chancellor of the Exchequer in his speech on the last Clause?

As my hon. and learned Friend pointed out, there would in the ordinary way probably not be a taxable surplus. The fact that a taxable surplus exists in many undertakings now is due to what might be called the deferred maintenance that they have been unable to carry out. Why have they not been able to carry it out? Because conditions have not allowed them to do so, and, as we on this side have been saying in debate over and over again for the last five years, the Government have not enabled sufficient progress to be made in these vital matters of water supply. Time and time again, as the OFFICIAL REPORT would show, we have criticised the Government in regard to their starving water undertakings, especially in rural areas, of the pipes necessary for their purposes.

I do not want to repeat the anomalies catalogued by my hon. and learned Friend. If it were merely a question of having one law for the private enterprise water companies and another for the local authority, no doubt that could be defended by the Government as part of the peculiar mission of Socialism; but there is the further anomaly that there is different treatment for local authority water undertakings. I cannot see how this can be defended on any principle at all. I maintain that there is no justification for this Profits Tax on water companies. This Government were the first in the history of the country to put a tax on bread. Now, as my hon. Friend has said, they are the first to put a tax on water. That will be the epitaph of this Government.

The Financial Secretary to the Treasury (Mr. Douglas Jay)

The hon. and learned Gentleman the Member for Ilford (Mr. Hutchinson) put a persuasive and detailed case for exempting these statutory undertakings from the Profits Tax. He did not convince me that he advanced strong enough reasons for making an exception as against all the other public utilities. His arguments seemed cogent when seen simply in relation to water undertakings, but we must consider them against the background of the structure of this tax.

The general principle of the Profits Tax, in its present form, is that where you are dealing with private companies who have a substantially unlimited power of paying dividends to private shareholders, the tax should be levied at the higher rate of 50 per cent. of distributed profits; but where we are concerned with nationalised industries or undertakings such as these public utilities, which are subject to one form or another of limitation on the rate of dividend, or the rate of charge, or other limitations of that kind, the tax should fall on them at the much lower rate of 10 per cent. When one considers into which of these categories these undertakings should fall, I think there is no doubt that broadly they should go into the class liable to tax at 10 per cent.

Mr. Hutchinson

The hon. Gentleman mentioned an unlimited right to pay dividends, but does he appreciate that the ordinary capital of the water companies is almost invariably fixed dividend capital?

Mr. Jay

Yes, I was saying that where there was an unlimited right to pay dividends the tax fell at the higher rate.

Mr. Hutchinson

I was pointing out to the hon. Gentleman that in my experience it is almost invariably the case that there is no unlimited right of paying dividends.

Mr. Jay

I was referring to the general run of privately-owned companies outside the water industry, and pointing out that the tax falls at the heavy rate. The hon. and learned Gentleman said that these concerns were not trading organisations, and therefore ought not to be liable to tax. However, they make profits in the relevant sense of profits for this tax. If they do not make profits in this sense, clearly they would not pay tax. Therefore, there would be no argument between us.

The hon. and learned Gentleman explained how the consumer pays a charge not in accordance with the amount of water he consumes. That is true, but he did not seem to me to establish the conclusion that therefore the water concerns should be exempt from Profits Tax. I do not think the conclusion follows from his argument. The hon. and learned Gentleman also said that water undertakings were different from ordinary commercial undertakings, and by that I understood him to mean commercial undertakings not in the water industry. We recognise that important distinction by imposing a Profits Tax of only 10 per cent. on water undertakings, coupling them with nationalised industries rather than with ordinary companies.

Finally, the hon. and learned Gentleman explained that there were certain detailed anomalies which would arise between one water company and another. No doubt it is true that with this tax, as with any tax, there are bound to be detailed anomalies, however elaborate the system; but it is clear that there would be a more glaring anomaly if we were to select one class of public utility—the statutory water undertakings—for exemption from this 10 per cent. tax, while levying it on bus companies and other utility concerns. For these reasons, I cannot advise the Committee to accept this Amendment.

Captain Crookshank (Gainsborough)

I have been looking round to see whether the hon. Member for Ealing, North (Mr. J. Hudson) was here. I do not know what has happened to him. We have had an hour's debate on water. It speaks well for the Committee that at this late hour we have been discussing this matter at all, and with such passionate speeches from all sides on a subject upon which the Financial Secretary poured a cold douche.

I do not understand the Financial Secretary's attitude. It seems to me that the arguments of my hon. and learned Friend were conclusive. He pointed out that two-thirds of the water undertakings were local authorities or joint boards, that the rural water supplies had to be subsidised, and therefore taxing any profits was only taking money out of one pocket into which it had been put and putting it into the other, and that we paid for water by rate irrespective of whether we used it or not—whether we had a bath or not, whether we washed our teeth or not, or took it with whisky or not.

The hon. Member for Deptford (Mr. J. Cooper) pointed out the extremely difficult position of the Metropolitan Water Board, which from the number of their customers must be one of the largest water undertakings in the world. The Metropolitan Water Board can never make profits, because as soon as their surplus reaches a certain figure, it has to go in reduction of the water rate, and they never have profit in the meaning employed in the rest of this Clause. That seemed to me a valid argument, which the Financial Secretary never touched on at all.

11.30 p.m.

The use of the word "profits" is confusing. We understand what it means in dealing with ordinary commercial undertakings, but when one comes to something in the region of a statutory undertaking like this, particularly in the case of the Metropolitan Water Board, whose statute, so tightly drawn, prevents it from making what would commercially be considered to be a profit, the Government decide to consider it in the same category as an ordinary business, which frankly exists to make profits for the benefit of the community, its shareholders and its employees. The two are not relevant, yet the same word is used in that connection.

But the Financial Secretary says that one must look at the background to the tax and at its structure. I do not think it is a very exciting thing to look at any way. Apart from that, he says it is reasonable that statutory undertakings should be based on the same rate as are nationalised undertakings. It is all right just to say that, and that is all that happens; but the hon. Gentleman did not argue that there is any particular reason why they should be, nor is there any, except that it is convenient. Nationalised industries have been nationalised by Statute, and by some strange strain of thought they are joined together with statutory undertakings.

I suppose it is a good explanation. He could have given reasons if he wanted to do so, but he did not: nor did he intend to argue the case that these statutory undertakings should be coupled with nationalised undertakings. It may be that some day the Socialist Party are going to nationalise water—it was included in one or other of their election manifestos, but is now in suspended animation, if water could be. Therefore, in order to clear the way against that eventuality, the Government now place it on the same basis as nationalised industries.

We on this side do not begin to accept any of his arguments, which do not make any sense at all. We are moved not only by the arguments of the hon. and learned Gentleman, who is perhaps one of the greatest experts on this question in this country, but who has a pellucid description

in argument, as anyone must know who heard his finer points, but by the hon. Member for Deptford, who speaks as a member of the great undertaking which provides this capital with its needs in water.

The Financial Secretary chooses to ignore all arguments, and merely says that water equals coal, gas and electricity which have already been nationalised because presumably the Government hope to nationalise water one day. That is not a good enough argument, and, although there is much more work to do, if my hon. Friend cares to press his Amendment to a Division, I will gladly follow him into the Lobby.

Question put, "That those words be there inserted."

The Committee divided: Ayes, 285; Noes, 293.

Division No. 111.] AYES [11.34 p.m
Aitken, W. T. Conant, Maj. R. J. E. Grimston, Robert (Westbury)
Alport, C. J. M. Cooper, Sqn. Ldr. Albert (Ilford, S) Harden, J. R. E.
Amery, Julian (Preston, N.) Cooper-Key, E. M. Hare, Hon. J. H. (Woodbridge)
Amory, Heathcoat (Tiverton) Corbett, Lt.-Col. Uvedale (Ludlow) Harris, Frederic (Croydon, N.)
Arbuthnot, John Craddock, Beresford (Spelthorne) Harris, Reader (Heston)
Ashton, H. (Chelmsford) Cranborne, Viscount Harvey, Air-Codre. A. V. (Macclesfield)
Assheton, Rt. Hon. R. (Blackburn, W.) Crookshank, Capt. Rt. Hon. H. F. C Harvey, Ian (Harrow, E.)
Astor, Hon. M. L. Crosthwaite-Eyre, Col. O. E. Harvie-Watt, Sir George
Baker, P. A. D. Crouch, R. F. Hay, John
Baldock, Lt.-Cmdr. J. M. Crowder, Capt. John (Finchley) Head, Brig. A. H.
Baldwin, A. E. Crowder, Petre (Rulslip—Northwood) Headlam, Lt.-Col. Rt. Hon. Sir Cuthbert
Banks, Col. C. Cundiff, F. W. Heald, Lionel
Baxter, A. B. Cuthbert, W. N. Henderson, John (Cathcart)
Beamish, Maj. Tufton Davidson, Viscountess Hicks-Beach, Maj. W. W.
Bell, R. M. Davies, Rt. Hon. C. (Montgomery) Higgs, J. M. C.
Bennett, Dr. Reginald (Gosport) Davies, Nigel (Epping) Hill, Dr. Charles (Luton)
Bennett, William (Woodside) de Chair, Somerset Hill, Mrs. E. (Wythenshawe)
Bevins, J. R- (Liverpool, Toxteth) De la Bère, R. Hinchingbrooke, Viscount
Birch. Nigel Deedes, W. F. Hirst, Geoffrey
Bishop, F. P Digby, S. Wingfield Hollis, M. G.
Black, C. W. Dodds-Parker, A. D. Holmes, Sir Stanley (Harwich)
Boles, Lt.-Col. D. C. (Wells) Donner, P. W. Hope, Lord John
Boothby, R. Douglas-Hamilton, Lord Malcolm Hopkinson, Henry
Bossom, A. C. Drayson, G. B. Hornsby-Smith, Miss P.
Bowen, E. R. (Cardigan) Drewe, C. Horsbrugh, Rt. Hon. Florence
Boyd-Carpenter, J. A Dugdale, Maj. Sir Thomas (Richmond) Howard, Gerald (Cambridgeshire)
Boyle, Sir Edward Duncan, Capt. J. A. L. Howard, Greville (St. Ives)
Bracken, Rt. Hon. B. Dunglass, Lord Hudson, Sir Austin (Lewisham, N.)
Braine, B. R. Duthie, W. S. Hudson, Rt. Hon. Robert (Southport)
Braithwaite, Sir Albert (Harrow, W.) Eccles, D. M. Hudson, W. R. A. (Hull, N.)
Braithwaite, Lt.-Cr. G. (Bristol, N. W.) Eden, Rt. Hon. A. Hurd, A. R.
Bromley-Davenport, Lt.-Col. W. Elliot, Rt. Hon. W. E Hutchinson, Geoffrey (Ilford, N.)
Brooke, Henry (Hampstead) Erroll, F. J. Hutchison, Lt.-Cmdr. Clark (E'b'rgh W.)
Browne, Jack (Govan) Fisher, Nigel Hutchison, Colonel James (Glasgow)
Buchan-Hepburn, P. G. T. Fort, R. Hyde, Lt.-Col. H. M.
Bullock, Capt. M. Foster, John Hylton-Foster, H. B.
Bullus, Wing Commander E. E. Fraser, Hon. Hugh (Stone) Jennings, R.
Burden, F. A. Fraser, Sir I. (Morecambe & Lonsdale) Johnson, Howard (Kemptown)
Butcher, H. W Fyfe, Rt. Hon. Sir David Maxwell Jones, A. (Hall Green)
Butler, Rt. Hn. R. A. (Saffron Walden) Gage, C. H. Joynson-Hicks, Hon. L. W.
Carr, Robert (Mitcham) Galbraith, Cmdr. T. D. (Pollok) Kaberry, D.
Carson, Hon. E. Gammans, L.D. Kerr, H. W. (Cambridge)
Channon, H. Garner-Evans, E. H. (Denbigh) Kingsmill, Lt.-Col. W. H.
Churchill, Rt. Hon. W. S. Gates, Maj. E. E. Lambert, Hon. G.
Clarke, Col. Ralph (East Grinstead) Gomme-Duncan, Col. A. Lancaster, Col. C. G.
Clarke, Brig. Terence (Portsmouth. W.) Granville, Edgar (Eye) Langford-Holt, J.
Clyde, J. L. Gridley, Sir Arnold Law, Rt. Hon. R. K.
Colegate, A. Grimston, Hon. John (St. Albans) Leather, E. H. C.
Legge-Bourke, Maj. E. A. H Noble, Cmdr. A. H. P. Stevens, G. P.
Lennox-Boyd, A. T Nugent, G. R. H. Steward, W. A. (Woolwich, W.)
Lindsay, Martin Nutting, Anthony Stewart, Henderson (Fife, E.)
Linstead, H. N. Oakshott, H. D. Stoddart-Scott, Col. M.
Llewellyn, D. Odey, G. W. Storey, S.
Lloyd, Rt. Hn. Geoffrey (King's Norton) O'Neill, Rt. Hon. Sir Hugh Strauss, Henry (Norwich, S.)
Lloyd, Maj. Guy (Renfrew, E.) Ormsby-Gore, Hon. W. D. Stuart, Rt. Hon. James (Moray)
Lloyd, Selwyn (Wirral) Orr, Capt. L. P. S. Studholme, H. G.
Leckwood, Lt.-Col. J. C. Orr-Ewing, Charles Ian (Hendon, N.) Summers, G. S.
Longden, Gilbert (Herts, S. W.) Orr-Ewing, Ian L. (Weston-supar-Mare) Sutcliffe, H.
Low, A. R. W. Osborne, C. Taylor, Charles (Eastbourne)
Lucas, Sir Jocelyn (Portsmouth, S.) Peake, Rt. Hon. O. Taylor, William (Bradford, N.)
Lucas, P. B. (Brentford) Perkins, W. R. D. Teeling, W.
Lucas-Tooth, Sir Hugh Peto, Brig. C. H. M. Teevan, T. L
Lyttelton, Rt. Hon. O. Pickthorn, K. Thomas, J. P. L. (Hereford)
McAdden, S. J. Pitman, I. J. Thompson, Kenneth Pugh (Walton)
McCorquodale, Rt. Hon. M. S. Powell, J. Enoch Thompson, Lt.-Cmdr. R. (Croydon, W.)
Macdonald, A. J. F. (Roxburgh) Price, Henry (Lewisham, W.) Thorneycroft, Peter (Monmouth)
Macdonald, Sir Peter (I. of Wight) Prior-Palmer, Brig. O. Thornton-Kemsley, Col. C. N.
Mackeson, Brig. H. R. Profumo, J. D. Thorp, Brig. R. A. F.
McKibbin, A. Raikes, H. V. Tilney, John
McKie, J. H. (Galloway) Rayner, Brig. R. Turner, H. F. L.
Maclay, Hon. John Redmayne, M. Turton, R. H.
Maclean, Fitzroy Remnant, Hon. P. Tweedsmuir, Lady
MacLeod, Iain (Enfield, W.) Renton, D. L. M. Vane, W. M. F.
MacLeod, John (Ross and Cromarty) Roberts, Emrys (Merioneth) Vaughar-Morgan, J. K.
Macmillan, Rt. Hon. Harold (Bromley) Roberts, Maj. Peter (Heeley) Vosper, D. F.
Macpherson, Major Niall (Dumfries) Robertson, Sir David (Caithness) Wakefield, Edward (Derbyshire, W.)
Maitland, Cmdr. J. W. Robinson, Roland (Blackpool, S.) Wakefield, Sir Wavell (Marylebone)
Manningham-Buller, R. E. Robson-Brown, W. Walker-Smith, D. C.
Marlowe, A. A. H. Rodgers, John (Sevenoaks) Ward, Hon. George (Worcester)
Marshall, Douglas (Bodmin) Roper, Sir Harold Ward, Miss I. (Tynemouth)
Marshall, Sidney (Sutton) Ropner, Col. L. Waterhouse, Capt. Rt. Hon. C.
Maude, Angus (Ealing, S.) Russell, R. S. Watkinson, H.
Maude, John (Exeter) Ryder, Capt. R. E. O. Webbe, Sir H. (London & Westminster)
Maudling, R. Salter, Rt. Hon. Sir Arthur Wheatley, Maj. M. J. (Poole)
Medlicott, Brig. F Sandys, Rt. Hon. D. White, Baker (Canterbury)
Mellor, Sir John Shepherd, William Williams, Charles (Torquay)
Molson, A. H. E. Smiles, Lt.-Col. Sir Walter Williams, Gerald (Tonbridge)
Monokton, Sir Walter Smithers, Peter (Winchester) Williams, Sir Herbert (Croydon, E.)
Moore, Lt.-Col. Sir Thomas Smithers, Sir Waldron (Orpington) Wills, G.
Morrison, John (Salisbury) Smyth, Brig. J. G. (Norwood) Wilson, Geoffrey (Truro)
Morrison, Rt. Hon. W. S. (Cirencester) Snadden, W. McN. Winterton, Rt. Hon. Earl
Mott-Radclyffe, C. E. Soames, Capt. C. Wood, Hon. R.
Nabarro, G. Spearman, A. C. M. York, C.
Nicholls, Harmar Spence, H. R. (Aberdeenshire, W.)
Nicholson, G. Spent, Sir Patrick (Kensington, S.) TELLERS FOR THE AYES:
Nield, Basil (Chester) Stanley, Capt. Hon. Richard (N. Fylde) Mr. Popplewell and Mr. Delargy
NOES
Acland, Sir Richard Brown, Thomas (Ince) Donnelly, D.
Adams, Richard Burke, W. A. Driberg, T. E. N.
Albu, A. H. Burton, Miss E. Dugdale, Rt. Hon. John (W. Bromwich)
Allen, Arthur (Bosworth) Butler, Herbert (Hackney S.) Dye, S.
Allen, Scholefield (Crewe) Callaghan, L. J. Ede, Rt. Hon. J. C.
Anderson, Alexander (Motherwell) Carmichael, J. Edelman, M.
Anderson, Frank (Whitehaven) Castle, Mrs. B. A Edwards, John (Brighouse)
Attlee, Rt. Hon. C. R Champion, A. J Edwards, Rt. Hon. Ness (Caerphilly)
Awbery, S. S Chetwynd, G. R Edwards, W. J. (Stepney)
Ayles, W. H. Clunie, J. Evans, Albert (Islington, S. W.)
Bacon, Miss Alice Cocks, F. S. Evans, Edward (Lowestoft)
Baird, J. Coldrick, W. Evans, Stanley (Wodnesbury)
Balfour, A. Collick, P. Ewart, R.
Barnes, Rt. Hon. A. J. Collindridge, F Feryhough, E.
Bartley. P Cook, T. F. Field, Capt. W. J.
Bellenger, Rt. Hon. F. J. Cooper, Geoffrey (Middlesbrough, W.) Finch, H. J.
Bonn, Wedgwood Cooper, John (Deptford) Fletcher, Eric (Islington, E.)
Benson, G. Corbet, Mrs. Freda (Peckham) Follick, M.
Beswick, F. Cove, W. G. Foot, M. M.
Bevan, Rt. Hon. A. (Ebbw Vale) Craddock, George (Bradford, S.) Forman, J. C.
Bing, G. H. C. Crawley, A. Fraser, Thomas (Hamilton)
Blenkinsop, A. Crosland, C. A. R. Freeman, John (Watford)
Blyton, W. R. Crossman, R. H. S. Freeman, Peter (Newport)
Boardman, H. Cullen, Mrs. A. Gaitskell, Rt. Hon. H. T. N
Booth, A. Daines, P. Ganley, Mrs. C. S.
Bottomley, A. G. Dalton, Rt. Hon. H. Gibson, C. W.
Bowden, H. W. Darling, George (Hillsborough) Gilzean, A.
Bowles, F. G. (Nuneaton) Davies, A. Edward (Stoke, N.) Glanville, James (Consett)
Braddock, Mrs. Elizabeth Davies, Harold (Leek) Gooch, E. G.
Brook, Dryden (Halifax) Davies, Stephen (Merthyr) Gordon-Walker, Rt. Hon. P. C.
Brooks, T. J. (Normanton) de Freitas, Geoffrey Greenwood, Anthony (Rossendale)
Broughton, Dr. A. D. D. Deer, G. Greenwood, Rt. Hon. Arthur (Wakefield)
Brown, Rt. Hon. George (Belper) Dodds, N. N. Grenfell, D. R.
Grey, C. F. Mackay. R. W. G. (Reading, N.) Silverman, Julius (Erdington)
Griffiths, David (Rother Valley) McLeavy, F. Silverman, Sydney (Nelson)
Griffiths, Rt. Hon. James (Llanelly) MacMillan, Malcolm (Western Isles) Simmons, G. J.
Griffiths, William (Exchange) McNeil, Rt. Hon. H. Slater, J.
Guttler, R. J. MacPherson, Malcolm (Stirling) Smith, Ellis (Stoke, S.)
Hale, Joseph (Rochdale) Mainwaring, W. H. Smith, Norman (Nottingham, S.)
Hall, John (Gateshead, W.) Mallalieu, E. L. (Brigg) Snow, J. W.
Hall, Rt. Hon. Glenvil (Colne Valley) Mallalieu, J. P. W. (Huddersfield, E.) Sorensen, R. W.
Hamilton, W. W. Mann, Mrs. Jean Soskice, Rt. Hon. Sir Frank
Hannan, W. Manuel, A. C. Sparks, J. A.
Hardman, D. R Marquand, Rt. Hon. H. A Steele, T.
Hargreaves, A Mathers, Rt. Hon. G. Stewart, Michael (Fulham, E.)
Hastings, S. Mellish, R. J. Stokes, Rt. Hon. R. R.
Hayman, F. H Messer, F. Strachey, Rt. Hon. J.
Henderson, Rt. Hon. Arthur (Tipton) Middleton, Mrs. L Strauss, Rt. Hon. George (Vauxhall)
Herbison, Miss M Mikardo, Ian. Stross, Dr. Barnett
Hewitson, Capt. M Mitchison, G. R Summerskill, Rt. Hon. Edith
Hobson, C. R. Moeran, E. W. Sylvester, G. O.
Holman, P. Monslow, W Taylor, Bernard (Mansfield)
Holmes, Horace (Hemsworth) Moody, A. S. Taylor, Robert (Morpeth)
Houghton, D. Morgan, Dr. H. B. Thomas, David (Aberdare)
Hoy, J. Morley, R. Thomas, George (Cardiff)
Hubbard, T. Morris, Percy (Swansea, W.) Thomas, Iorwerth (Rhondda, W.)
Hudson, James (Ealing, N.) Mort, D. L. Thomas, Ivor Owen (Wrekin)
Hughes, Emrys (S. Ayrshire) Moyle, A. Thorneycroft, Harry (Clayton)
Hughes, Hector (Aberdeen, N.) Mulley, F. W Thurtle, Ernest
Hynd, H. (Accrington) Murray, J. D Timmons, J
Hynd, J. B. (Attercliffe) Nally, W. Tomney, F.
Irvine, A. J. (Edge Hill) Neal, Harold (Bolsover) Turner-Samuels, M.
Irving, W. J. (Wood Green) Noel-Baker, Rt. Hon. P. J. Ungoed-Thomas, Sir Lyn
Isaacs, Rt. Hon. G. A. O'Brien, T. Usborne, H.
Janner, B. Oldfield, W. H Vernon, W. F.
Jay, D. P. T. Oliver, G. H Viant, S. P.
Jeger, George (Goole) Orbach, M. Wallace, H. W
Jeger, Dr. Santo (St. Pancras, S.) Padley, W. E Watkins, T. E.
Jenkins, R. H. Paget, R. T. Webb, Rt. Hon. M. (Bradford. C.)
Johnson, James (Rugby) Paling, Rt. Hon. Wilfred (Dearns V[...]y) Weitzman, D.
Johnston, Douglas (Paisley) Paling, Will T. (Dewsbury) Wells, Percy (Faversham)
Jones, David (Hartlepool) Pannell, T. C. Wells, William (Walsall)
Jones, Frederick Elwyn (W. Ham, S.) Pargiter, G. A. West, D. G.
Jones, Jack (Rotherham) Parker, J. Wheatley, Rt. Hon. John (Edinb'gh E.)
Jones, William Elwyn (Conway) Paton, J. White, Mrs. Eirene (E. Flint)
Keenan, W. Pearson, A. White, Henry (Derbyshire, N. E.)
Kenyon, C. Peart, T. F. Whiteley, Rt. Hon. W.
Key, Rt. Hon. C. W. Perter, G. Wilcock, Group Capt. C. A. B.
King, Dr. H. M. Price, Philips (Gloucestershire, W.) Wilkes, L.
Kinghorn, Sqn. Ldr. E. Proctor, W. T. Wilkins, W. A.
Kinley, J. Pryde, D. J. Willey, Frederick (Sunderland)
Lang, Gordon Pursey, Cmdr. H. Willey, Octavius (Cleveland)
Lee, Frederick (Newton) Rankin, J. Williams, David (Neath)
Lee, Miss Jennie (Cannock) Rees, Mrs. D. Williams, Rev. Llywelyn (Abertillery)
Lever, Harold (Cheetham) Reeves, J. Williams. Ronald (Wigan)
Lever, Leslie (Ardwick) Reid, Thomas (Swindon) Williams, Rt. Hon. Thomas (Don V'lly)
Lewis, Arthur (West Ham, N.) Reid, William (Camlachie) Williams, W. T. (Hammersmith, S.)
Lewis, John (Bolton, W.) Rhodes, H. Wilson, Rt. Hon. Harold (Huyton)
Lindgren, G. S. Richards, R. Winterbottom, Ian (Nottingham, C.)
Lipton, Lt.-Col. M. Robens, Rt. Hon. A. Winterbottom, Richard (Brightside)
Logan, D. G. Roberts, Goronwy (Caernarvonshire) Wise, F. J.
Longden, Fred (Small Heath) Robertson, J. J. (Berwick) Woodburn, Rt. Hon. A.
McAllister, G. Robinson, Kenneth (St. Pancras, N.) Wyatt, W. L.
MacColl, J. E. Rogers, George (Kensington, N.) Yates, V. F.
McGhee, H. G. Ross, William Younger, Hon. K.
McGovern, J. Royle, C.
McInnes, J. Shawcross, Rt. Hon. Sir Hartley TELLERS FOR THE NOES:
Mack, J. D. Shinwell, Rt. Hon. E. Mr. T. G. D. Galbraith and
McKay, John (Wallsend) Shurmer, P. L. E. Mr. Heath

Question put, and agreed to.

11.45 p.m.

Colonel J. R. H. Hutchison

I beg to move, in page 17, line 6, at the end, to insert: (b) in computing the profits from any such trade or business a deduction shall be made equal to the total amount which is required by or by virtue of an Act of Parliament to be raised by such statutory undertakers for sinking fund purposes in connection with that trade or business in respect of the accounting period if the following conditions are fulfilled—

  1. (i) the statutory undertakers have no share capital:
  2. (ii) the interest on all the stock and other loan capital of the statutory undertakers is calculated at a fixed rate.
The last Amendment we discussed sought to remove from the effect of Profits Tax all the activities of the water undertakings. I am not so ambitious in this Amendment, the purpose of which is to exempt statutory undertakings, public utilities, which have no share capital, and whose interest payments are calculated at fixed rates, from Profits Tax on the amounts which they have to set aside for sinking funds. In his reply, the Financial Secretary to the Treasury, in speaking on the last Amendment, said that the water undertakings were profit makers at times, and so had to pay Profits Tax on the profits they made. But this Amendment seeks only to remove from the effect of Profits Tax those statutory sinking fund payments which the public utilities are obliged, by their statutes, to set aside each year.

Earlier on, the Chancellor of the Exchequer said that he wanted to put the public utility undertakings on the same basis as nationalised industries. I should like to trace for a moment how previous Chancellors dealt with this same problem. Under the 1937 Act, these statutory undertakings were exempt from the National Defence Contribution, which was the precursor of Profits Tax, and the then Chancellor of the Exchequer, when he was allowing this concession, said that public utility undertakings were subject to statutory restrictions in regard to prices charged, or dividends payable, and he thought they should be exempt. That, I think, is a reasonable attitude. Then we move on to 1940, and again similar representations were made, and a similar concession was granted. I will not trouble the Committee by reading the terms of that concession; but they are, broadly speaking, what we are asking for.

Now let us look at nationalised industry itself, the pattern of which the Chancellor of the Exchequer said he wanted to follow in respect of these public utilities. It is true that when the nationalisation Bills were under discussion, we on this side of the Committee asked that these industries should bear the same taxation as would apply to private enterprise concerns in the same circumstances. Broadly speaking, that is the pattern which has been set up. But an industrial concern is allowed its depreciation before striking its profits and its fixed-interest-bearing debenture stock is also exempt.

In order to check the exact position of a nationalised industry in operation, and the tax it must pay, I looked at the accounts of the Scottish Gas Board for its first accounting period, and in those accounts, which ended in March, 1950. I found the following entries. In the revenue account, item 28, there is a figure to cover amortisation of capital expenditure, and which covers renewal of assets, depreciation and debt redemption, of £583,690. That left, after deduction of this sum, a surplus of £169,780, which was carried to the net revenue account.

Then, if we look at the net revenue account, we find that, starting with a surplus, it ends with a deficit; but in the item which provides for taxation there is no provision for taxation at all—neither for Income Tax nor for Profits Tax. If we were to add back the amortisation and debt redemption figure of £583,000, we should ultimately get the figure liable to Profits Tax under the provision which the Chancellor of the Exchequer says ought to apply to public utility concerns.

So I contend that the public utility concerns are put in a worse position than industrial concerns, and in a worse position than the nationalised industries; and it will not have escaped the Financial Secretary's attention that nationalised industries complained to the Millard Tucker Committee of the incidence on profits for similar payments. So if it is considered that, where a concern is bound by so many restrictions and is not a profit-making concern, it should be liable in this way, then we think it a most unfair provision. It is only fair that these payments to its sinking fund should not be liable to Profits Tax.

Mr. Maudling

The case for this Amendment is very strong. Repayments of loans are normally deductions for Profits Tax purposes and we think that principle should apply in this case. The principle for which we plead was recognised in the Excess Profits Tax legislation, which was very analogous to this. There was an explicit provision for sinking fund payments of local authorities to be exempt from Excess Profits Tax, and Section 33 of the 1939 or 1940 Finance Act extended this to statutory undertakings. The wording here is, I believe, exactly the same as that used on the earlier occasion, and I commend the adoption of this principle, which has both logic and justice on its side.

Mr. Jay

The objection to this Amendment, which seems to us to be conclusive, can be stated quite briefly. The hon. and gallant Member who moved it suggested that loan repayments should be allowed as a deduction for Profits Tax purposes in the case of these statutory undertakers. The Committee is aware that loan repayments have always been regarded for tax purposes as an allocation from profits and not something included in the deduction of profits before computation; and that is a rule which applies for all companies of all kinds which pay Profits Tax.

The hon. and gallant Member referred to depreciation as being deducted before profits were computed; but depreciation is, of course, a deduction before computing profits, and that is in the whole structure of Income Tax and Profits Tax. Repayment of debt, as I see it, is not such a deduction, and since that is the general rule, I do not think we can make an exception for this one class of undertaking.

The hon. Member for Barnet (Mr. Maudling) advanced a very ingenious argument based on the Excess Profits Tax provisions in the Finance Acts of 1939 and 1940; but I remind him that there was a special reason because that Excess Profits Tax was based on a "base period" and if different provisions for loan repayments had been made in the base period on the one hand, and in the chargeable period on the other, there would have been unfairness. But that is not a substantial parallel with the present Profits Tax, which does not depend on any base period at all. Therefore, for that reason I think we are bound not to accept this Amendment.

Mr. Bell

Before the hon. Gentleman sits down, if the depreciation provision takes the form of a sinking fund, does he say nevertheless that it should then be treated as repayment of a loan and not depreciation, and should not be treated as an expense for Profits Tax?

Mr. Jay

Genuine depreciation will, of course, be counted as a deduction for Profits Tax or Income Tax purposes.

Sir H. Williams

I do not understand the Financial Secretary's explanation. I rather wonder whether he understands it. I am not entirely unintelligent and I have listened to his explanation and I understand that this Clause might apply to institutions like the Port of London Authority, the Mersey Docks and Harbour Board, the Clyde Navigation, and a whole lot of these people. They have no share capital and the interest on all the stock and other loan capital of the statutory undertakers is calculated at a fixed rate. I think that is true. These people have a sinking fund which in effect is to a large extent a depreciation. That was very true of the municipal electricity undertakings. When the Government nationalised them, they bought them at the written-down value. Many of them thought the Government cheated them, and I think they were right, because the Government were working on this principle. I was not in the House at the time but I think that when the Government nationalised that part which was already municipalised, they robbed them in this way.

If I am right—and I think I am right about this—here are sums placed on one side, in effect, to provide for a depreciation charge. In the ordinary business, depreciation charges are quite properly charged against profits. It seems that these sinking funds are also in the same category. It is a different way of dealing with the same problem. I used to have some connection with the electricity supply industry under private enterprise, which was more efficient than when it was under the municipal authorities. One worked on the depreciation basis and the other on the sinking fund basis.

This Amendment is very reasonable indeed and the Financial Secretary has given an explanation which does not seem to make any sense at all, but we do not expect any sense from the Government Front Bench in these days. [Interruption.] Of course we do not.

Mr. Manuel (Ayrshire, Central)

The hon. Gentleman should know.

Mr. Jack Jones (Rotherham)

Do not be saucy.

Sir H. Williams

Of course, we do not expect any sense from the Government Front Bench. I think the Financial Secretary's explanation is profoundly unsatisfactory, and I hope that before we go to a Division, we shall have a better explanation.

12 midnight

Mr. Erroll (Altrincham and Sale)

I hope we shall get a proper explanation, because it is wrong that depreciation should be a charge against Profits Tax but sinking fund should not be, because they are technically one and the same thing. Either one can put aside money for depreciation so that when the asset is worn out one has the equivalent sum of money available to buy a new asset to maintain the business in being or, alternatively, if the original lenders of the money prefer it, one should put aside a sum of money each year out of the working of the business so that, at the end of the life of the asset, one could repay the money with which one bought it in the first place. In one case money is put aside and allowed as a charge against the business; in the other it is not, and is subject to Profits Tax. It is a situation which is entirely anomalous, and I am sorry we have not had a satisfactory explanation so far.

Mr. G. Hutchinson

The reply which the Financial Secretary has given on this Amendment illustrates the fallacy of attempting to apply the Profits Tax to these non-profit-earning undertakings. There is all the difference in the world between an undertaking which earns its money by selling something to the public and being paid for what it sells, and an undertaking whose revenues are derived from providing a service for which they are remunerated according to a fixed scale.

The difference between those two classes of undertakings is that if we impose Profits Tax upon the class of undertaking which is not selling anything but is providing a service in return for a fixed charge, the Profits Tax must eventually be added to the charge which the undertaking makes to the public. That will happen in the case of the dock authorities to which my hon. and gallant Friend referred. Eventually the Profits Tax will be charged to the public in the form of the rates which they pay for the service.

In the case of the nationalised gas or electricity industries, the position is entirely different. Those industries are selling something to the public. True it is that they are selling it in return for a fixed price. The difference is that in some years they may sell more and in some years they may sell less. In the years when they sell more they make a profit in the true sense of the term and it can no doubt be subjected fairly to Profits Tax. In the years when they do not sell so much, they do not make the profit and there is no tax. It does not necessarily follow that in the case of those undertakings the Profits Tax is passed on to the public in the form of increased charges.

That is the fallacy which lies behind the proposals of the right hon. Gentleman in this Budget. He does not recognise that the essential difference between an undertaking which is truly a trading one and one which is truly a public service undertaking. The result will be that this Profits Tax will be passed on in the case of the water undertakers to the consumers; in the case of the dock undertakings, to the public who, indirectly, make use of the docks.

Mr. Peter Roberts (Sheffield, Heeley)

There is one point on which I wonder whether the Financial Secretary can help us. I am a little worried about the question of depreciation or sinking fund. To my mind the argument would be valid to exempt this from Profits Tax if the sinking fund takes the place of depreciation. Can the Financial Secretary tell the Committee whether these authorities are entitled to deduct depreciation in arriving at their figures? If they are entitled to do so, that would weigh with me in considering this argument, because I feel that they could not deduct depreciation and sinking fund at the same time.

Mr. Jay

They are entitled to deduct depreciation in just the same way as other taxpayers.

Commander Galbraith (Glasgow, Pollok)

Can the hon. Gentleman say whether they do so or not? Can he tell the Committee now that these undertakings year by year write down their assets by some fixed sum? Do they write them down and take that into then-accounts?

Mr. Jay

I do not know the details in regard to each undertaking, but quite clearly, since they own a large amount of plant and machinery, there must be an adequate depreciation.

Mr. Bell

I hope the Financial Secretary will give a better answer than that to the question of my hon. and gallant Friend the Member for Pollok (Commander Galbraith). As I understand it, these public statutory undertakings either borrow money from the Public Works Loan Board or raise it from the public, and the terms on which it is to be repaid are set forth in the Act of Parliament establishing the undertaking. Everybody knows that the period over which the amortisation takes place is related to the estimated life of the equipment. That being so, it is a statutory pre-estimate of the depreciation.

I believe it is correct that in a great many cases the provision for depreciation is through that statutory sinking fund, which is itself the estimate of the life of the plant. The Financial Secretary's comparison of this to paying off a loan is not correct if by that he means the paying off of a loan by a private company, because that company makes a separate provision for depreciation, and if it pays off a loan, it is of course, in doing so, allocating its profits. But that is entirely a different position from what we have here when we are dealing with the statutory sinking fund of a public undertaking.

Colonel J. R. H. Hutchison

I noticed that the Financial Secretary was about to answer some of the questions we put to him.

Mr. Jay

Perhaps I may make a brief reply to the hon. Gentleman the Member for Buckinghamshire, South (Mr. Bell). I think he will agree that there is a plain distinction between depreciation and loan repayment. It is perfectly clear that these undertakings have the right to claim an allowance from their profits for depreciation. In whatever detailed way they make provision for depreciation, they are entitled to claim that.

Mr. Bell

Let us suppose no provision was made for depreciation laid down to the sinking fund, and let us suppose that the Treasury, in its wisdom superior to that of the legislature, decided it is an excessive sinking fund and more than the depreciation of all the assets. Are we to understand in that case that the Treasury would make some apportionment of the sinking fund and say that so much of this was depreciation and so much was profit, or would they sweep it aside in one broad gesture and say that it was all allocation of profit?

Mr. Jay

The undertaking would have to make its case to the Inland Revenue in the ordinary way, and they would decide what was justified.

Sir H. Williams

Surely the Financial Secretary is wrong. I have been a member of two local authorities. [Interruption.] I am not infallible, but I do read the documents and I do not think hon. Members opposite either read or listen. I say that sanction has been granted for a loan to this local authority or that on the basis that it has got to be repaid over a period of years. In other words, in that period they have to pay into the sinking fund enough money to wipe out the assets. Surely, that is exactly the same thing as the depreciation allowance an ordinary company makes.

I do not understand, and I do not think the Financial Secretary understands in the least degree, what is the difference between depreciation and a sinking fund. At the end of the period the asset is wiped out and the undertaking will be assessed by the Inland Revenue for the whole cost of the wiped-out asset. Certain organisations do not do it that way. They have to provide a sinking fund so that by the time the asset is finished the money is all in the fund. Therefore, the sinking fund is, in certain ways, similar to depreciation. When the Financial Secretary says they are allotting depreciation as well as the sinking fund, I do not believe him, and I think he should inform himself better.

Colonel J. R. H. Hutchison

In asking leave to withdraw this Amendment, it seems to me that the situation is still very obscure and that the obscurity is deepened for me in the words that I quoted to the Financial Secretary of the treatment of the accounts of the Scottish Gas Board. I ask him whether he will have this examined. There, it appears, they are allowed a deduction for renewal of assets, depreciation, and debt redemption—all three. If that is so, his previous statement seems to be misleading; indeed, the whole situation is obscure. Therefore, I beg to ask leave to withdraw the Amendment at this stage, so that we can return to the charge when more is known about it.

Amendment, by leave, withdrawn.

Colonel J. R. H. Hutchison

I beg to move, in page 17, line 7, to leave out from beginning, to "no," in line 9.

Here I hope for better luck. The position is much clearer and I feel that the Financial Secretary will be much more inclined to show sympathy in what I am asking. The Amendment again concerns public utility undertakings. Another new burden has been developed in this Finance Bill against them in what looks like a blitzkrieg by the Treasury against these public utilities.

When Profits Tax was first introdued, relief to commercial concerns in respect of losses which they had incurred in the six years prior to the introduction of the tax was allowed. They were allowed to carry forward these losses before they were asked to meet their Profits Tax liability. Here, however, when Profits Tax is now for the first time made applicable to these public utility concerns, no such sympathy is shown to them and they are denied the facilities which were allowed to commercial concerns at the time of the introduction of the tax.

I am speaking particularly in support, or consideration, of dock and harbour authorities, but I have no doubt that many other public utility concerns are hit in the same way. Dock and harbour authorities have incurred in recent years very heavy expenses in relation to operating and replacement costs. They have been anticipating the future at a time when perhaps the income was not coming in as rapidly or extensively as they hoped, and they have gone in for development schemes. They now find that the losses which they have incurred for these years are not allowed and they are very badly prejudiced by this Bill.

I had not realised the Treasury were so antipathetic to public utility concerns, which, after all, come half way between private enterprise and nationalised undertakings. I suggest that this Amendment represents only a simple, straightforward act of common justice, to which the Financial Secretary ought to agree to.

12.15 a.m.

Mr. Jay

I am glad to say that I can on this occasion be rather more sympathetic to the hon. and gallant Gentleman, though not so far as to go the whole way that he asks. His Amendment would allow the undertakings in question to deduct losses going back for six years from the profits on which they would be liable to tax. That, as he quite rightly said, was the original provision included in the Profits Tax when it was introduced in 1937.

The reason given at the time was that the Profits Tax was imposed at the beginning of the re-armament period, and was meant to fall mainly on the profits it was thought were likely to be made as a result of the re-armament programme; and it was thought reasonable—and this is where the circumstances are rather different from today—that losses should be counted against those profits since in the previous six years of rather acute depression some concerns might have been making large losses.

That last item hardly applies today. It can be argued that these public utility undertakings have been rather lucky to escape Profits Tax, if not Excess Profits Tax, throughout the last 14 years, and therefore there is no good case for giving them further relief of this kind. Indeed, when the nationalised industries were brought under Profits Tax in 1947, they were taken as if they had started business in that year and were not allowed any deduction for previous losses. It does seem, however, that a case can be made, not for going back over six years, but for going back to the year 1947, when the Profits Tax was established in its present form and the war-time Excess Profits Tax abolished.

Sir H. Williams

The nationalised industries have been very successful in exempting themselves from Profits Tax by making losses.

Mr. Maudling

I understood the hon. Gentleman to say that Profits Tax was imposed in 1937, and losses were allowed to be set off over six years back because substantial losses had been incurred in that period. He says that the same does not apply now because no substantial losses have been incurred in the six-year period before the present proposal. If there have not been large losses, surely the loss to the Treasury by accepting this Amendment would be very small.

Sir H. Williams

I gather that when I referred to the losses of the nationalised industries, certain hon. Members opposite suggested it was because they were paying interest. [HON. MEMBERS: "Compensation."] Very well, compensation. Is it now the policy of the party opposite to repudiate every kind of obligation, including savings?

Colonel J. R. H. Hutchison

Half a loaf is obviously better than no bread, but in asking leave to withdraw this Amendment may I point out how quickly matters do go when the hon. Gentleman is agreeable?

Amendment, by leave, withdrawn.

Motion made, and Question proposed, "That the Clause stand part of the Bill."

Mr. G. Hutchinson

I am very disappointed at the manner in which the Financial Secretary has dealt with this Clause. The difficulty was that he was endeavouring to defend a case which was really indefensible. Take the instance of the hon. Gentleman opposite who referred to the Metropolitan Water Board. I ventured to interrupt the hon. Gentleman and point out that every water undertaking is in the same position as the Metropolitan Water Board when the statutory limit on its reserve fund has been reached. The surplus then becomes taxable at once. The Metropolitan Water Board, although they do not enjoy the advantage of having a statutory reserve, are really in no different position from any other local authority in relation to this charge.

I imagine that what is going to happen to the Metropolitan Water Board is that as the operating costs increase they will not make any application for increased charges but will go to the local authorities in London and, as they are entitled to do, levy on them a deficiency payment. The deficiency will, in fact, be added to the London rates. That happened for many years. The Metropolitan Water Board year by year made a deficiency and the deficiency was charged on the London rates. It was only in comparatively recent times that the charges were readjusted and the deficiency rate on the local authorities disappeared. Exactly the same thing is going to happen in the case of other local authorities, the effect being that the deficiency will be passed on to the ratepayers.

The position of local authorities varies considerably in this matter. In the case of some they have the right to supplement their revenue from rates, and that supplementary revenue is not liable to tax; therefore, they may escape Profits Tax altogether. In the case of other authorities, they have to pay Profits Tax on the whole of their taxable revenue. The hon. Gentleman never attempted to deal with this. I suspect that the Treasury were unaware of the existence of this difference in the financing of local authority water undertakings. I hope it is not too late for the hon. Gentleman to look at this again before Report stage to see whether there is any justification for imposing this tax in circumstances in which it must inevitably be passed on to the public.

Mr. Pitman

In discussing the taxing of a new class of taxpayer, I should like to go into the general principles of the tax. The Financial Secretary said that Profits Tax was started in 1937, but I would remind him that it was not a Profits Tax but the National Defence Contribution. It is part of my theme that "Profits Tax" is a misnomer for the tax, which is now to be applied to this new class of taxpayer. We have been told by the Chancellor of the Exchequer the principles to which he attaches importance for imposing this so-called Profits Tax on enterprise. He said it is an antidote to inflation and a means of keeping down high dividends. I do not see how these arguments, which the Chancellor says are general to Profits Tax, are applicable in this case.

The right hon. Gentleman highly commended the speeches of various hon. Members on his own side who had spoken in favour of the principles of this tax. If I remember rightly, the chief point made by the hon. Gentleman the Member for Stoke-on-Trent, South (Mr. Ellis Smith), was that we in this Committee do wish to know that there would be some guarantee that if these companies were let off this proposed new imposition, they would put the money to reserve and would spend it in developing higher technical facilities within that unit.

I think it was my hon. Friend the Member for Barnet (Mr. Maudling) who answered him intelligently and to this effect: We are being asked what guarantee there is that we will kiss the girl if the girl is there, and we are saying how can we kiss her if she is not there. If there are not going to be these resources in a company to be spent on development and improvement, then obviously that development and improvement cannot take place.

I should like hon. Gentlemen opposite not to assume always that the people running business of this kind are not just as anxious to run and equip them and to expand their services to the public as they ought to be; but if the party opposite are to proceed on the basis of taxing more and more the reserves by which the companies are able to expand and develop their businesses, it is hardly surprising—as has been pointed out—that there is criticism that the amount of the horse-power per man employed is lower here than it is in America.

The hon. Member for Wednesbury (Mr. S. N. Evans) made a point that something had to be done in regard to higher rates of profit, but does that arise in the case of these companies? It seems to me that clearly it does not. Most of them are statutory undertakings, and the rate of distribution which they are allowed to make is severely limited by the Statute which set them up. Even if that was so, is it a sound thing to impose a tax of this kind on a company, basing it on the supposition that all of them are making profits when we have heard from the Financial Secretary that one of his difficulties in accepting an Amendment moved by one of my hon. Friends was that there have been losses, even if not very great losses?

At any rate there have been losses, and it seems to me that in imposing a tax on a company to stop high profits and to base and levy that tax on companies irrespective of whether they are making more profit or not is palpably and obviously absurd. It is like locking up everyone because there are some criminals, but locking up the criminals for a longer time than those who have done no wrong.

Let us face the fact that even with these new and increased rates of Profits Tax there can be companies making no more profit than they were before who will have to pay the tax. It seems to me that it must be wrong in a situation of this kind to seek to impose additional taxation and to reduce reserves, as they must, of companies that are so subjected to tax.

12.30 a.m.

The whole question of this tax arises because of fundamental mis-thinking in regard to Profits Tax. The great merit of the taxation system of this nation is that it is based on income, and I submit to the Committee that the principle of a tax on profits is a departure from the former sound principle and a departure which is certain to get this Committee—as in this Clause and all other Clauses dealing with Profits Tax—into considerable trouble. Income is something which is quite clearly understood and which is quite properly taxable. If one has a greater income one has a greater ability to bear tax. But "profit" is a term of art within the Companies Act and has nothing whatever to do with the ability to bear tax. It has, per contra, to do with the priority rating as between the sundry creditors of that company and those who receive a prior or a subordinate share of the total receipts. If they receive an income by way of interest on debenture, they rank before the sundry creditors, but if they receive it by way of dividend on a share they rank after the sundry creditors.

We are here applying to the practice of taxation a discrimination based on something which is not a reality in the field of ability to pay but which is a term of art in quite a different field of activity—namely, what happens in the event of a winding-up of a company. The hon. Member for Wednesbury, to whom we listen with great attention, has had experience inside a chartered accountant's office and he will know quite well that the revenue of any corporation is not its profit but its gross profit—the difference between what it receives and what it pays out for its primary activity. There is within that field of gross profit a sub-division of those payments which are in respect of capital borrowed and those which are not. Depending entirely on how the capital of that company has been categorized, those who are responsible for seeing that the sundry creditors are properly treated segregate that part of the gross profit which is to rank below the creditors in such priority and call it profit.

If I might take an example, let us suppose that one of these big corporations has a gross profit of £50,000. Let us suppose that £10,000 of that is remuneration on the capital employed. That capital employed may rank vis-à-vis the sundry creditors in one extreme way or the other extreme way. In one extreme way we might have the very maximum of debentures, we might have notes, the landlord who puts up the premises which the docks or railway, or whatever it is, might supply the capital for all the premises and even for the plant; and we might have only a small fraction of the whole capital put up in the form of ordinary shares or ordinary stock.

On the other hand, we might have the opposite extreme of no money borrowed on debentures, nothing on notes, the company owning all its own property; and in that case we have the whole capital structure of that company put up in the form of ordinary shares or ordinary stock. In the first case the so-called profit is very small, in the second the whole £10,000 is called profit. In point of fact, that difference is a legal reality solely in terms of priorities in winding-up and in payments out in relation to what are the rights of the people who trade with the company and who make advances and afford credit.

It is here sought to base the taxation system on something which palpably has nothing to do with income. In other words, the capital in both these things is exactly the same and the revenue is exactly the same, but in one case we tax them scarcely at all while in the second case we impose a tax very, very much higher than in the other, and only because those who founded the second company happen to have subordinated all their claims for capital to the people with whom they do their trading; in other words, they are more enterprising, whereas the other has taken very little risk and has raised almost all its capital in the form of debentures, notes, etc.

I regard it as a very great error to extend a principle of taxation which, in itself, is bad to a whole host of new taxable corporations, as is done in this Clause. The situation will always, and inevitably, be wrong if the Government try in this way to tax on an irrelevancy which has nothing to do with taxation at all.

Mr. Arthur Lewis (West Ham, North)

What about Clause 25?

Mr. Pitman

That is the Clause we are discussing at the moment, and it is the one on which we are debating the application of the Profits Tax. Profits Tax is, from now onwards, to be applied to a whole host of new companies to whom it has hitherto never been applicable. Clearly, if it is wrong to apply that tax to the companies to which it has hitherto been applied, it is equally wrong to apply it to these new ones, and this is the chance for this Committee to look into the principles on which this tax is levied and to see whether it is right or wrong so to extend the application of this tax.

The Financial Secretary has not replied on the general principle of Profits Tax in so far as it is applied to these new companies, and I think the Committee should ask him sincerely to consider this question of principle: Does he really intend to extend to these new fields of taxpayers a tax which is in essence wrong, because it is based, not on the income and capacity of the taxpayer to pay it, but is based solely on the fortuitous circumstance of how, in relation to the sundry creditors, the various providers of capital stand in order of priority.

Mr. Joynson-Hicks (Chichester)

I wish to support what my hon. Friend the Member for Bath (Mr. Pitman) has just said. It really has thrown a considerable light upon our discussion, because I confess that before this debate on Clause 25 began I had very little knowledge indeed of what the Clause purported to do. Since then I have listened with the greatest attention to the advice which has been given to the Committee from both sides and have unhesitatingly come to the conclusion, upon the arguments which have been addressed to the Committee, and upon the advice which we have received, that this proposal is a bad tax, and I do not think we ought to go on with it.

It seems to me that we want to know more about the objects and the anticipated results of this tax than the Government have so far told us. If these companies make a loss, it is the loss of statutory undertakings, and the loss will be met by the taxpayers or ratepayers in one form or another. If they make any sort of profit it goes back to the Treasury again, so that in either case the public will be hit, and it will not get any benefit from being hit in this way.

Therefore, the first question I ask the Financial Secretary is: How much does he expect to get out of this tax? The second question is whether the Financial Secretary has taken into account the ramifications of administration which the tax will involve. It is clear that this is not going to be a simple tax to collect. It will not be a simple tax to calculate. For the net benefit which is likely to accrue from this tax to the Treasury, it seems to me that the Treasury is going to become involved, both itself and with the various statutory undertakings concerned, in a vast multiplicity of bureaucracy which is going to eat up the benefit of the tax.

We are dealing with Section 19 (5) of the Finance Act, 1937, and the trades and businesses which are exempted by that subsection are now being made liable to Profits Tax. That is the proposal. May I remind the Committee that by subsection (5), the statutory undertakings are specifically defined as being undertakings, and the various public utilities are precluded by virtue of an enactment from charging any higher price for their services than that authorised by, or by virtue of, the enactment. Therefore, they are already entirely controlled with regard to the profits which they can make, and what is the object, or the benefit, to be gained by following any of the lines of argument which have been addressed to us from the Treasury bench with regard to withdrawing surplus money to resist inflation, or any of the other Budgetary arguments? What is the object, and what is the value of this tax?

Clause ordered to stand part of the Bill.

GLOBAL ISLES COURT OF RECORD